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Education Reforms in A Bipartisan Path Forward

Although most discussion of Erskine Bowles' and Al Simpson's Bipartisan Path Forward has focussed on its health and tax reforms, the plan also includes changes in discretionary spending as well as $265 billion of other mandatory savings. Of that, a small but significant $35 billion comes from reforming higher education spending.

Importantly, that $35 billion isn't just cuts; rather, it is the net effect of a number of policies meant to improve higher education financing while fulfilling many of the Bipartisan Path Forward principles includling "cut spending we cannot afford," "replace dumb cuts with smart reforms," "protect the disadvantaged," and "make America better off tomorrow than it is today."

The centerpiece of the education reforms is fixing two issues in higher education programs: (1) the imminent doubling of Stafford loan interest rates in July of this year and (2) the implicit $50 billion shortfall facing the Pell Grant program. The plan addresses both of these issues in a permanent fashion by reallocating and retargeting spending within the higher education budget.

To address the interest rate spike, the plan proposes a solution we've talked about before, one that was part of the President's budget: linking the interest rate to a market-based rate like Treasuries. That would enable the interest rate to stay low in the short term and rise more gradually in the longer term than the quick jump that would happen in July. The budgetary result: larger deficits in the short term -- though not as large as continuing current interest rates indefinitely -- and smaller deficits over the longer term once interest rates return to normal levels. The proposal in the President's budget is estimated to save about $15 billion over ten years, though the proposal from Simpson and Bowles would be modestly more generous and save a little bit less.

To address the shortfall in the Pell Grants program which offers college aid to low-income students, the plan would reform the student loan program enjoyed by many middle-class students. Most significantly, it would repeal the in-school interest subsidy for undergraduate student loans (it has already been eliminated for graduate students), which defers accrual of interest on loans until after a student graduates. According to Bowles and Simpson, "this subsidy is neither well-targeted to those who need it nor effective in encouraging higher education." Additional savings could come from a number of smaller reforms described in detail in the report.

A portion of these savings would go to deficit reduction, but the majority would go to closing roughly 80 percent of the Pell Grants shortfall (the report calls for the remaining shortfall to be closed through savings and efficiencies within the Pell program).

Our proposal included a broad array of reform proposals, covering loans, grants, tax expenditures, transparency, and other federal aid issues, and it is meant to be seen as an entire package, not a menu of options, because each component of aid affects the others. We stand by that belief, but we are pleased to see other groups arrive at the same conclusions that we did in reforming the federal student aid system: Policymakers can better spend the significant resources they have already committed to federal student aid programs to benefit students, taxpayers, and other education stakeholders.